CA Vivekanand Pote

Appointment of Auditors

Every company at its first AGM shall appoint auditor (either individual or firm). The auditor shall hold office from the conclusion of that AGM till the conclusion of sixth AGM. And thereafter till the conclusion of every sixth AGM. Proposed auditor shall submit the certificate of eligibility for appointment under Companies Act 2013 & Chartered Accountants Act 1949, terms allowed and limits laid down. the company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed.

The rotation of auditors is mandatory for the listed companies, unlisted companies having paid up share capital of Rs. 10 crore or more, all private limited companies having paid up share capital of Rs. 20 crore or more, all other companies ( excluding OPC & small companies) having paid up share capital below threshold limit but having public borrowing financial institutions, banks or public deposits of Rs. 50 crore or more.

An individual is eligible to appoint as auditor only for one term of 5 consecutive years while a firm can be appointed as auditor of the same company for two terms of 5 consecutive years. The existing companies shall comply with the requirement of rotation of auditors within 3 years. The members of the company may resolve, in the audit firm appointed the partner and his team shall be rotated at intervals. The audit may be conducted by more than one auditor.

The first auditors shall be appointed by BOD within 30 days from the registration of the company failure to which the members shall be informed and within 90 days appoint the auditors in EGM. Such auditor will hold office till conclusion of first AGM.

The casual vacancy other than by way of resignation shall be filled by BOD within 30 days. If the casual vacancy is as a result of resignation, such vacancy shall also be approved by AGM in within 3 months. The auditor shall hold office till conclusion of next AGM.

A retiring auditor may be re-appointed in AGM if he is not disqualified for re-appointment, he has not given the company a notice in writing of his unwillingness to be re-appointed and a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed.

Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.

Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.

Removal & Resignation of Auditors

The auditor may be removed from his office before expiry of his term only by a special resolution of the company after obtaining the previous approval of CG. The concerned auditor shall be given the reasonable opportunity of being heard.

The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement indicating the reasons and other facts as may be relevant with regard to his resignation with the company and the Registrar otherwise he is punishable with fine ( Rs. 50,000 to 5,00,000).

Special notice shall be required for a resolution at an AGM appointing as auditor a person other than a retiring auditor or providing expressly that a retiring auditor shall not be re-appointed, except where the retiring auditor has completed a consecutive tenure of 5 or10 years. The company shall forward the notice to the auditor. Auditor shall send representation in writing to the company. The company shall circulate the representation of the auditor to the members. The auditor may require that the representation shall be read out at the meeting. If the copy of representation is not sent to members it shall be filed with ROC. If the Tribunal is satisfied on an application either of the company or of any other aggrieved person that the representation rights conferred are being abused by the auditor, then the copy of the representation may not be sent and the representation need not be read out at the meeting.

Tribunal suo motu or an application by CG or any other person if satisfied that auditor has directly or indirectly has acted fraudulently it may order, direct the company to change the auditor. If the final order is passed, the auditor shall not be appointed as auditor of any company for a period of 5 years.


A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant. In case of a firm majority of partners practicing in India shall be qualified for appointment.

Persons not eligible to appoint as auditors are

→ body corporate other than LLP

→ a person who is a partner or who is in the employment of an officer or employee of the company

→ a person who, or his relative or partner

  • holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company. Relative may hold the securities not exceeding Rs. 1,000.
  • indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of Rs. 1 Lac
  • has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed
  • a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company
  • a person whose relative is a director or is in the employment of the company as a director or key managerial personnel
  • a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies
  • a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction
  • any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialized services


The BOD may fix the remuneration for first auditor. Subsequently the remuneration shall be fixed in AGM.

Powers and duties of auditors

  1. Right to access the books of holding as well as subsidiary in relation to consolidation. Auditor can inquire the following matters :-

a. whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members

b. whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company

c. where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company

d. whether loans and advances made by the company have been shown as deposits;

e. whether personal expenses have been charged to revenue account

f. where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading

  1. Make report to shareholders on compliance of accounting and auditing standards and true and fair view of the financial statements.

3. The auditors report shall also state :-

a. whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements

b. whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him

c. whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report

d. whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns

e. whether, in his opinion, the financial statements comply with the accounting standards

f. the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company

g. whether any director is disqualified from being appointed as a director under sub-section (2) of section 164

h. any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith; Powers and duties of auditors and auditing standards.

(i) whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls;

(ii) such other matters as may be prescribed.

For any of the above matter the answer is negative the auditor shall state the reasons for qualification.

  1. The auditor shall comply with the auditing standards.
  2. CG shall prescribe the auditing standards recommended by ICAI in consultation with NFRA.

  3. If an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government. If not complied auditor is punishable with fine Rs. 1 Lac to 25 Lacs

Other Services by Auditors

Auditor can provide such other services as approved by BOD. The auditor can not provide following services to holding or subsidiary company :-

  1. accounting and book keeping services;
  2. internal audit;
  3. design and implementation of any financial information system;
  4. actuarial services;
  5. investment advisory services;
  6. investment banking services;
  7. rendering of outsourced financial services;
  8. management services; and
  9. any other kind of services as may be prescribed:

Signature to audit report

The person appointed as auditor shall sign the audit report. The qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company

Auditor to attend AGM

All the notices and communications related to AGM shall be forwarded to the auditor. The auditor shall attend AGM either himself or through representative and have the right to be heard at the meeting.

Punishment for contravention

If the provisions are contravened, the company shall be punishable with fine ( Rs. 25,000< fine< Rs. 5,00,000). The officer of the company in default is punishable with imprisonment maximum for 1 year or with fine ( 1 Lac < fine < Rs. 25 Lacs ). The auditor shall be punishable with fine ( Rs. 25,000< fine< Rs. 5,00,000 ). if an auditor has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine fine ( 1 Lac < fine < Rs. 25 Lacs ). If the auditor is convicted, he is liable to compensate for damages.CG shall ensure the prompt payment of damages through a statutory body. The liability of partners in audit firm shall be joint and several.

Cost Audit

CG may order the class of companies engaged in production of goods or providing of services direct the particulars of utilization of material or labour or other itmes of cost to be included in books of accounts of the company. CG may direct cost audit for certain class of companies and it shall be done by a cost accountant.

(Author is Working as Finance Professional in Automobile Industry and can be contacted at )

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  1. Thilagar M says:

    The Auditors tenure in a private limited company comes to end due to borrowings exceeding the prescribed limit of Rs. 50 Crores. However before the completion of term the liability reduced to below Rs. 50 Crores. Can he be reappointed.

  2. sankar says:

    139(10) says Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company –

    1. What are the penalties for non-appointment of auditor?
    2. What is the need for appointment of auditors when 139(10) is there?

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December 2020